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Entrepreneurs and business advocates applaud the Jumpstart Our Business Startups (JOBS) Act, passed by the House last week, as a step toward lowering regulatory hurdles that prevent small business from accessing capital. If passed by the Senate, the bill's measures will update SEC regulations some say were created for a different time. And one component of the bill addresses a potentially disruptive technology innovation.

Crowdfunding is already having a transformative effect on society and business. (For example, see an NPR story last week about how game-maker Double Fine circumvented publishers and raised $2 million in a matter of days to develop a new product). The JOBS Act proposes to permit startups to go beyond soliciting donations (as Double Fine did), so they can actually sell small stakes in their businesses online to unaccredited investors.

As The Corporate Counsel pointed out on Monday, "not everybody is wild about the approach contemplated by these JOBS Act measures":

Beyond the obvious question of whether, as the name implies, these securities law tweaks will actually have any impact at all on the employment market, some have raised concern that investor protections might be compromised. For example, last week [former SEC chief accountant] Lynn Turner testified before the Senate Banking Committee and noted: "The proposed legislation is a dangerous and risky experiment with the U.S. capital markets, and the savings of over 100 million Americans who depend on those markets. The evidence does not support the need for it. In fact, it contradicts it. I do not believe it will add jobs but may certainly result in investor losses.

A New York Times editorial on Sunday called the Act "a terrible package of bills that would undo essential investor protections, reduce market transparency, and distort the efficient allocation of capital." The Times linked to testimony from University of Florida finance professor Jay Ritter and an article he authored as evidence that "regulation has not been an impediment to raising capital." More than 20 consumer organizations signed a letter to Senators Timothy Johnson and Richard Shelby saying the JOBS Act rolls back "regulations that are essential to protecting investors from fraud and abuse, promoting the transparency on which well-functioning markets depend, and ensuring the fair and efficient allocation of capital."

Testifying on the upside of crowdfunding, Tim Rowe, CEO of the Cambridge Innovation Center, a “coworking” space that houses 450 tech and life sciences companies, urged the Senate Banking Committee to consider the levels of capital that could be made available to startups: “Americans save about $30 trillion in 401ks, pension funds, IRAs, and so forth." Redirecting just 1 percent of that to crowd-funded local businesses, he said, would create a pool of money 10 times greater than all the venture capital invested annually and half as big as all outstanding small business loans in the U.S.

Rowe also addressed the fraud question. He noted that in the U.K., where laws already permit crowd-funded investing, and among U.S. crowd-investing services that cater to accredited investors, there have been no complaints of fraud to date.

While the Senate variations of the proposed legislation would regulate crowdfunding intermediaries such as Kickstarter, the House bill doesn’t go that far. The New York Times editors say, "Extensive revisions must be made to the House legislation for it to be even minimally acceptable."

But Nick Tommarello, a Boston entrepreneur who has become something of a crowdfunding activist, shares the view of many who have real-life crowdfunding experience. He says incentives are already there for intermediaries to regulate themselves. Tommarello believes crowd investing platforms will need to do due diligence on businesses they host in order to attract investors. Take Kickstarter for example, he says. “They take only a limited number of the projects that come to them. As an intermediary, you want the best companies to be on your website, and you want quality over quantity.” Tommarello, whose business operates out of Rowe’s incubator, coordinated a public forum in Boston last week (video of event here) where panelists included Senator Scott Brown and Representative Patrick McHenry, both authors of crowdfunding legislation. And an online petition he started has gathered more than 2,700 signatories who have collectively pledged to invest over $6.6 million in crowd-funded new businesses if Congress passes a bill.

It's easy to see why small business advocates welcome legislation that would give them access to capital they can't get from the banks. But how to explain the broad bipartisan support for a bill that some consider to be so irresponsible? The Times editors blame "election-year politics and powerful constituencies":

Republicans love it because deregulation is at the core of their corporate-centered agenda. President Obama wants to burnish his pro-business credentials. Apparently Senate Democrats, aware of big business’s deep campaign contribution pockets, are eager to go along.

For less cynical reasons, Tommarello is optimistic that the Senate will pass a version of the bill, but offers a dose of reality: “Best case scenario is that this would pass in May. Then the SEC would begin rulemaking. We’re at least a year away.” But when the day comes, he’ll be ready. He’s already built a crowd investing platform, WeFunder.com.